Week Ahead: Not So Happy Anniversary

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As if substantive data was not enough, now superstition threatens the stock market. October 19, you see, marks the 21st anniversary of Black Monday, the infamous day the stock market collapsed. On that scourge of financial markets history, the Dow Jones Industrial average fell 22.6%.

I know what you are thinking. Two weeks ago, the Dow fell 18.2% over five days. So, your worst fears are confirmed then; we are currently traversing through black days indeed. The index is down 22.5% over the last five weeks, a period characterized by incessant decline. Each week, the market dropped further into the abyss; that is, up until last week. Believe it or not, the Dow actually increased in value last week, rising 4.7%.

Here's more good news! There were no catastrophic corporate debacles of the "too big to fail" sort. No matter though... the federal government still found more use for funds we don't have nonetheless. The feds announced a plan to employ an approximate $250 billion of the $700 billion emergency funds just allocated to them, to take a preferred equity interest in nine of the nation's largest banks. The Nine are now implicitly "too big to fail," just like Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) were, but common shareholders are not in any way protected from future loss of interest, nor current dilution of it.

The government urged these banks to spread the money around the rest of the banking system, and to lend to businesses and individuals as well. It's widely expected that there will be a second round of government giveaway to the next tier of bumbling banks sometime soon, but whether the money will come from the $250 billion lot or the greater $700 billion pool is unclear. If you were wondering how the market reacted on the day of announcement, well, it opened higher, but closed lower on the day. This illustrates the lack of confidence investors have in their government and the financial system.

The government's Depression Era-like action was distressing to many, especially since the Treasury deployed the Emergency Rescue funds differently than most of us were told they would. Recall, Paulson was supposed to use the money to buy illiquid assets from banks. Not just that though; the action was something more characteristic of a socialist government than of a capitalistic one.

The Week Ahead

With recession now expected, but catastrophe seemingly stemmed, stock movement looks dependent now on economic reports and corporate earnings news. Thank the Lord, the week ahead holds little in store on the economic front. However, earnings season will be in full force, and considering analysts' consensus estimates for the full year and next still look bloated, this could drive disappointment. Expect guidance and forecast revisions, not to mention analysts' rating downgrades.

Besides correctly measuring the impact of recession on the companies whose shares you hold, the most important questions to ask regarding your individual stocks now is how much of soft expectations have already been priced into them, and how well will their management teams handle the situation.

Monday

Fed Chairman Bernanke jumps back into the spotlight on Monday morning, as he travels up the Hill to testify before the House Budget Committee at 10:00 a.m. We expect Bernanke to field interrogation on why emergency funds are being used for preferred equity purchase instead of the widely anticipated acquisition of illiquid assets. While the lengthy contract may authorize the Treasury to do so, it was clearly not expected. Two other Fed representatives are scheduled to speak on Monday as well. Look for comments from Atlanta Fed Chief Lockhart and Fed Governor Kroszner.

Leading Indicators for the month of September is curiously seen increasing 0.2%, after falling 0.5% in August. Third quarter GDP seems certain to recess, and even a small increase in this data point should not alter that view. Indicators decreased in both July and August.

Monday's earnings schedule highlights reports from American Express (NYSE: AXP), Texas Instruments (NYSE: TXN), BancorpSouth (NYSE: BXS), Equifax (NYSE: EFX), Halliburton (NYSE: HAL), Hasbro (NYSE: HAS), IDEX (NYSE: IEX), Lincare Holdings (Nasdaq: LNCR), Lockheed Martin (NYSE: LMT), Mattel (NYSE: MAT), Nabors Industries (NYSE: NBR), Netflix (Nasdaq: NFLX), Novartis (NYSE: NVS) and SanDisk (Nasdaq: SNDK).

Tuesday

Barron's writer Michael Santoli points toward Tuesday's due date on Lehman credit default SWAPS as a key obstacle for sincere equity rally. In doing so, he also implies that anxiety might be eased if things work out smoothly.

The reporting of the State Street Investor Confidence Index and ICSC Weekly Same-Store Sales data should offer news of further deterioration, but nothing unexpected. From the moment that "back to school" shopping season concluded, weekly sales growth has decelerated almost systematically. Last week's growth was reported down to just 1.0%, year to year, and 0.7% on a weekly basis. The State Street Investor Confidence Index stood at 70.7 in September, which represented deterioration from 77.2 in August. Judging by the Michigan Consumer Sentiment reading of 57.5 in October (down 13 points from September), this data point should fall dramatically.

The Bank of Canada has a regularly scheduled meeting on Tuesday, and is seen cutting rates further. Barron's speculates another 50 basis point move is possible. Treasury Secretary Paulson is set to discuss China and the global economy at a New York City dinner event. Minneapolis Fed Chief Gary Stern will also grab a microphone on Tuesday.

The day's earnings slate highlights Apple (Nasdaq: AAPL), Manpower (NYSE: MAN), National City (NYSE: NCC), 3M (NYSE: MMM), Biogen Idec (Nasdaq: BIIB), BlackRock (NYSE: BLK), Brinker Int'l (NYSE: EAT), Broadcom (Nasdaq: BRCM), Caterpillar (NYSE: CAT), Coach (NYSE: COH), Cree (Nasdaq: CREE), DuPont (NYSE: DD), Everest Re (NYSE: RE), First Cash (Nasdaq: FCFS), Forest Labs (NYSE: FRX), Invitrogen (Nasdaq: IVGN), Kelly Services (Nasdaq: KELYA), Lexmark (NYSE: LXK), Norfolk Southern (NYSE: NSC), Panera Bread (Nasdaq: PNRA), Pfizer (NYSE: PFE), Schering-Plough (NYSE: SGP), Tellabs (Nasdaq: TLAB), U.S. Bancorp (NYSE: USB), UAL (Nasdaq: UAUA), VMware (NYSE: VMW) and Yahoo! (Nasdaq: YHOO).

Wednesday

Every other Wednesday, commercial banks must meet reserve requirements. As a result, the Fed Funds Rate can vary sharply on this particular day as large money center banks seek to meet the Fed's requirement at any cost. Rates tied to the Fed Funds Rate are therefore susceptible to variation as well.

Look for the regular reports from the Mortgage Bankers Association and the Energy Information Administration Wednesday morning. The MBA's last check on mortgage activity showed a modest increase in activity on volatile rates. Because rates ended that period higher, we would anticipate a decrease in activity this time around. However, this data is not moving stocks these days, so it's a nonstarter.

Oil inventory increased again last week, though oil prices have solidified on news that OPEC will cut production. The market will react to the degree of OPEC cutbacks, not the action, so prices could continue to fall if OPEC acts modestly. We expect the price to trend lower over the next few months, possibly far enough to retest $50, the point we correctly suggested investors buy oil in January of 2007. Of course, this all depends on if/when Israel bombs Iran. We happen to expect this to happen before the next president takes office, unless McCain wins.

Wednesday earnings schedule gets heavy, and includes news from Amazon.com (Nasdaq: AMZN), McDonald’s (NYSE: MCD), Boeing (NYSE: BA), Allegheny Technologies (NYSE: ATI), AllianceBernstein (NYSE: AB), Amgen (Nasdaq: AMGN), AT&T (NYSE: T), Baidu (Nasdaq: BIDU), Baker Hughes (NYSE: BHI), Chipotle Mexican Grill (NYSE: CMG), Cirrus Logic (Nasdaq: CRUS), ConocoPhillips (NYSE: COP), Covance (NYSE: CVD), EMC Corp. (NYSE: EMC), GlaxoSmithKline (NYSE: GSK), GSI Commerce (Nasdaq: GSIC), Kimberly Clark (NYSE: KMB), Merck (NYSE: MRK), Northrop Grumman (NYSE: NOC), NutriSystem (Nasdaq: NTRI), Philip Morris (NYSE: PM), Robert Half (NYSE: RHI), SLM Corp. (NYSE: SLM), Techne (Nasdaq: TECH), Allstate (NYSE: ALL), Travelers (NYSE: TRV), Wachovia (NYSE: WB) and Wyeth (NYSE: WYE).

Thursday

Thursday's Jobless Claims Report offers notable risk to stocks. In recent weeks, the number of new benefits filers has eased off the 500K fear threshold. If data were to offer bad news here, it would be powerful enough to allow for further stock cascade. The economists' consensus is looking for 470K new jobless claims.

A House panel will question Alan Greenspan, John Snow and SEC Chief Christopher Cox on financial regulation. Cox is likely to take some heat, considering he's still in office. It should be interesting to see how the once idolized Greenspan is treated now that he's being partly blamed for the mortgage crisis because of how deep he took interest rates in the early part of this decade. George Soros and former Treasury Secretary Lawrence Summers join a City U panel on the future of the global economy.

Overseas, the Swedish Central Bank is seen holding rates steady, while New Zealand is expected to follow Australia's lead and cuts rates sharply. Look for the Natural Gas Storage Report at 10:30.

Thursday's earnings news should key on Aflac (NYSE: AFL), Cash America (NYSE: CSH), Microsoft (Nasdaq: MSFT), 1-800-Flowers (Nasdaq: FLWS), AirTran (NYSE: AAI), Altria (NYSE: MO), Bristol-Myers Squibb (NYSE: BMY), Burlington Northern Santa Fe (NYSE: BNI), Celgene (Nasdaq: CELG), Chubb (NYSE: CB), Cohu (Nasdaq: COHU), Credit Suisse (NYSE: CS), Daimler (NYSE: DAI), Eli Lilly (NYSE: LLY), Encana (NYSE: ECA), Ethan Allen (NYSE: ETH), Federated Investors (NYSE: FII), Friedman Billings Ramsey (NYSE: FBR), Hoku Scientific (Nasdaq: HOKU), Janus Capital Group (NYSE: JNS), Lab Corp. (NYSE: LH), MEMC Electronic Materials (NYSE: WFR), National Oilwell Varco (NYSE: NOV), Potlach (NYSE: PCH), Raytheon (NYSE: RTN), Cheesecake Factory (Nasdaq: CAKE), Dow Chemical (NYSE: DOW), US Airways (NYSE: LCC) and VCA Antech (Nasdaq: WOOF).

Friday

OPEC is meeting earlier than planned to discuss the sudden drop in crude prices. An overwhelming consensus of experts is looking for a production cut as a result. As we stated earlier in this article, it's the degree of cut that matters to the market here.

On Friday, I expect Existing Home Sales for September should fall short of consensus expectations for an annual pace of 4.92 million. However, housing is old news, and so stocks might not react.

A summit of European and Asian powers kicks off, as the two continents weigh their growing global importance. EU President Sarkozy views Europe as the emerging global leader, with US influence declining. President Bush and your favorite Greek think rumors of our demise are greatly exaggerated.

Friday's earnings reports highlight Fortune Brands (NYSE: FO), T. Rowe Price (Nasdaq: TROW), Banco Popular (MCE: POP.MC), Cache (Nasdaq: CACH), Gannett (NYSE: GCI), Idexx Labs (Nasdaq: IDXX), Ingersoll-Rand (NYSE: IR), Standard Register (NYSE: SR) and UST, Inc. (NYSE: UST).

Article interests: AMEX: DIA, AMEX: SPY, Nasdaq: QQQQ, NYSE: NYX, AMEX: DOG, AMEX: SDS, AMEX: QLD, AMEX: XLF, AMEX: IWM, AMEX: TWM, AMEX: IWD, AMEX: SDK. Please see our disclosures at the Wall Street Greek website and author bio pages found there.